June 2, 2016 / 6:12 PM / in 2 years

UPDATE 2-BoC concerned buyer expectations may be driving up home prices

(Adds background, comments on U.S. housing)

By Erin Pottie

SYDNEY, Nova Scotia, June 2 (Reuters) - The Bank of Canada is concerned that the increase in housing prices in Toronto and Vancouver may be partly due to purchases based solely on the expectation that prices will keep going up, Deputy Governor Lawrence Schembri said on Thursday.

Schembri said that Canadians moving away from resource-producing regions to the major cities of Toronto and Vancouver to find jobs has created a huge demand for housing in those cities, driving prices up as supply remains relatively limited.

But he expressed concern that such fundamentals are not the only reason for rising prices.

“The concern that we have at the Bank of Canada is these price increases may reflect in part the fact that certain people (are) buying housing on (speculation), expecting this price increase to continue,” said Schembri.

“People should not be buying housing based on the expectation these prices are going to continue” as the demand from the influx of workers into those regions will not continue at the same rate, Schembri said.

He was speaking during a question-and-answer session following a presentation on the outlook for the economy.

Canada’s housing market has been robust in the years since the financial crisis, boosted by low interest rates. But the collapse in oil prices has resulted in a more fractured market, with activity in commodity-sensitive regions slowing even as Toronto and Vancouver continue to gain.

The central bank in December said that the rapid growth in prices in Toronto and Vancouver increases their vulnerability to an adverse shock to demand. The bank will release its next Financial System Review next week.

“Our concern and our advice is it’s really up to the individuals making the purchases and the banks giving them a mortgage to take into account the fact that these house prices are unlikely to continue to grow at this rate,” Schembri said.

Nonetheless, Schembri said that the situation in Canada is “completely different” from the crisis the United States faced in 2007, noting the lack of a sub-prime mortgage market in Canada and higher mortgage underwriting standards.

Schembri also pointed to the number of steps the government has taken in recent years to shore up the mortgage market.

“The type of crisis we saw in the United States is just not going to happen.” (Reporting by Erin Pottie,; writing by Leah Schnurr; editing by Leslie Adler and Cynthia Osterman)

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